A few years ago, changing federal laws to lower drug prices was a key political issue. Some proposed allowing Medicare to negotiate lower prices from drug manufacturers and others recommended allowing U.S. citizens to import drugs from lower-priced developed countries such as Canada. These policies would certainly reduce drug prices, however, lower prices could also stifle drug innovation. Thus, the welfare effect on U.S. citizens is uncertain.

The welfare effect on citizens of other countries, however, has been largely ignored. It turns out, Candadians and other countries that currently have low-cost drugs could be the big losers if the U.S. begins negotiating drugs prices based on the prices paid in other countries. A paper by Danzon and Epstein explains why.

Why should drug prices be set on a controlled market, preventing healthy competition to drop down on prices and allow more options for consumers? It’s one thing to regulate the drug to ensure its safety addressing side effects, but it is another thing to disallow healthy competition.

This does not say that “increased competition would stifle innovation.”

Leaving aside the problem of counterfeits, the problem is that the lower prices in Canada result from administered prices, not market competition. An earlier paper by Danzon shows that US consumers pay less for drugs if one considers the package sizes they actually buy, and the fact that generics are less expensive in the more lightly price controlled US market than they are in markets where price controls stifle competition.

Administered prices plus cross-border trading has created problems for Canadians and, at present, the British. Drug companies award supplies of drugs based on the prices allowed. Countries where prices are kept artificially low get lower allocations. When higher paying foreigners buy the drugs in Canada or England and ship them abroad, local shortages develop.

Finally, Patricia Danzon is a respected researcher who has done important work. Dismissing her results because she was funded “in part by a pharmaceutical company” is a lazy way to avoid figuring out, and explaining, why one thinks her results might be in error.

It goes without saying that if drug makers are prevented from discriminatory pricing from one country to the next (or if buyers are allowed to legally conduct arbitrage), the drug prices worldwide would converge. Americans might get lower prices — but not by much. Europeans and Canadian would pay much higher prices. African, China and India would probably allow local firms to break patents because most of residents could never afford the World Price.